Edgewell Personal Care Co (EPC) 2016 Q4 法說會逐字稿

Good morning and welcome to the Edgewell fourth-quarter earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Chris Gough, Vice President, Investor Relations. Please go ahead.

Thank you, Kate, and good morning, everyone.

Thank for joining us for Edgewell's fourth-quarter FY16 earnings conference call. As a reminder, for comparative purposes FY15 full-year results include both the personal care and the household products businesses, with the results of the household products business presented in discontinued operations. Historical results on a continuing operations basis in FY15 include certain costs associated with supporting the operations of the household business, as these costs were not reported in discontinued operations.

As a result, full-year fiscal year EPS is not comparable to the prior year, as the prior year's results include SG&A expense, interest expense, spin cost, restructuring cost and tax associated with supporting the household business. Additionally, EPS was not comparable in the either the first, second, or third quarters of FY16.

To partially address this, we have provided normalized FY15 EBITDA reflecting pro forma adjustments to SG&A. You will find these normalizations in the non-GAAP reconciliations at the back of the press release issued earlier today and on our website.

With me this morning are David Hatfield, our President, Chief Executive Officer and Chairman of the Board, and Sandy Sheldon, our Chief Financial Officer. David will kick off the call and then hand over the to Sandy for the earnings and outlook discussion, followed by Q&A. This call is being recorded and will be available for replay via our website.

During the call we may make certain statements about our expectations for future plans and performance. This might include future sales, earnings, advertising and promotional spending, product launches, the impact of go-to-market changes on sales, savings and costs related to restructuring, changes to working capital metrics, currency fluctuations, commodity costs, category value, future plans for return of capital to shareholders and more. Any such statements are forward-looking statements, which reflect our current views with respect to future events.

These statements are based on assumptions and are subject to various risks and uncertainties, including those described in the caption Risk Factors in our annual report on form 10-K for the year ended September 30, 2015, as amended and supplemented in our quarterly reports on form 10-Q for the quarters ended December 31, 2015, March 31, 2016, and June 30, 2016. These risks may cause our actual results to be materially different from those expressed or implied by our forward-looking statements. We do not assume any obligation to update or revise any of these forward-looking statements to reflect new events or circumstances.

During this call we will refer to certain non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures are shown in our press release issued earlier today, which is available on the investor relations section of our website, www.Edgewell.com. Management believes these non-GAAP measures provide investors valuable information on the underlying trends of business.

With that, I would that I'd like to turn the call over to David.

Thanks, Chris, and good morning, everyone.

Before Sandy takes you through the results, I'll briefly comment on a few highlights of Edgewell's performance for the full fiscal year and then comment on our outlook for FY17. We are pleased with our FY16 results, which were in line with the plans that we set for ourselves at the beginning of the year and we are particularly pleased with the top-line performance for the year. Full-year organic net sales grew 1.4% and underlying sales growth, excluding the impact of our go-to-market changes, exceeded our expectations at 2.8%.

Let me spend a few minutes on the drivers of that growth. As we indicated at our Investor Day back in June of 2015, the FY16, it was going to be a transition year and a year where we could focus on -- or we would focus on four main business priorities to accelerate top-line growth. Our first priority, to complete go-to-market and functional realignment initiatives around the globe was completed in the third quarter. The impact in the year was within expectations, and the new structure and distributor relationships are working well.

Our second priority was to execute against our segment plans and to grow underlying sales in Wet Shave and Sun. For the year, Wet Shave organic net sales were up 1.8%, and Sun and Sun and skin organic net sales were up 4.6%. That is solid progress in these two key segments.

Within Wet Shave, we are benefiting from our next-generation Hydro product improvement and strong private label sales, including the recently introduced fitsMach3 private label product launched in the partnership with our US customers. We've also grown women's systems and shave preps this fiscal year behind innovation in that category management.

Third, we had to solidify and return to growth in North America. For the year, organic net sales in North America grew nearly 2%, driven by growth in Wet Shave and Sun and skin. Our fourth priority was to continue our momentum internationally. For the year, international organic net sales were up 1.1% and that included nearly four points of impact from go-to-market changes. Another solid year from our international team.

Now turning to bottom-line results, we achieved our outlook for adjusted earnings per share, while managing through very complex go-to-market and other structural changes that I discussed. Importantly, we were able to invest back into the business with A&P and R&D spends that finished the year within our target ranges. We invested in our strategic growth projects, including e-commerce, IT infrastructure and emerging markets, all of which fell into SG&A.

We also delivered on other elements of our strategic value drivers. For example, we have recently acquired Bulldog, a great new men's Skin Care company out of the UK. We are very excited about the prospects for that business. We repurchased over 2.5 million shares for the fiscal year.

Now, although we achieved many of our goals for the year, we have more work to do in other areas. Our Fem Care business remains a point of focus as we work to maintain sales and complete the consolidation of manufacturing to our Dover plant. Our overall SG&A spending remains higher than target and although much of that reflects the increased strategic investment, we're working on a number of key initiatives to help us address this issue. The competitive environment remains very intense and we need to continue to act with speed and agility.

As we look towards 2017, it's the same five value drivers and key priorities that will generate top- and bottom-line growth. Our first value driver to accelerate top-line growth will rely on our ongoing momentum in the Wet Shave business, driven by further growth in the international, growth through innovation across the full portfolio and aggressively adding to our capabilities in growth channels such as e-commerce and emerging markets. In Sun and Skin Care, we will drive growth through category growth and continued international expansion, including the new Bulldog acquisition.

In Fem Care, we will maintain top-line sales through new innovation and investment in growth brands, while focusing on cost savings to enhance profitability as we look to FY18. Of course, across all segments we need to monitor macroeconomic conditions and keep a close watch on the competitive environment. But based on what we see today, our outlook is for low-single-digit sales growth for FY17.

Turning to our second value driver, systematic cost reduction, we'll leverage productivity initiatives, including ongoing restructuring savings in FY17 and beyond. Our ZBS initiative is already yielding results, with more to come, and our trade management optimization initiative is producing results in North America.

These projects fit well into our culture of systematic cost reduction and will increase our operational and financial flexibility in 2017 to further enable our growth objectives and to drive margin expansion. We expect to generate at least 50 basis points of adjusted operating margin expansion for the full fiscal year.

Our third value driver, free cash flow generation, comes from a combination of top-line growth, operating margin expansion and the working capital improvements. Like we did this past year, we expect to achieve our free cash flow target of over 100% of net earnings for FY17. We will continue to take a disciplined and active approach to M&A, which is our fourth value driver.

Overall, we are encouraged as we enter FY17. Our outlook is for growth on both the top and the bottom line, growth that is in line with our longer-term algorithm.

Thanks, and with that, I will hand it over to Sandy.

Think you, David, and good morning, everyone.

Let me take you through the specifics for the quarter and highlights for the year. Net sales in the quarter were $611 million, an increase of $51 million, or 9%, driven by growth in all four segments and all key geographic regions. North American net sales were up 8.4%, with growth across all segments. International net sales increased 14.2%, or 11% on an organic basis, driven by growth in Wet Shave and Sun and Skin Care.

Gross margin was 51% of net sales, up 270 basis points over the prior year. The increase was primarily due to lower promotional spend and lower material costs, which were partially offset by higher startup costs related to the Fem Care production consolidation into our US plant. A&P expense was $82.6 million in the quarter, or about 13.5% of net sales, which represents a more normal level compared to relatively higher spend of 17% in Q4 2015.

SG&A was 17.7% of net sales, including $3.6 million of intangible amortization. Excluding $30 million in prior-year charges related to the spinoff of the Company's household products business, SG&A increased 100 basis points over the prior-year quarter. This increase was driven by higher spending and strategic growth projects, IT projects, and higher corporate costs, as well as increased compensation expense, including incentive compensation.

Other expense net was an expense of $2 million during the quarter compared to income of $3.5 million of the prior-year quarter. This change was largely driven by foreign currency hedging contract losses, particularly related to the Japanese yen, and revaluation losses on nonfunctional currency balance sheet exposures.

Net earnings in the quarter were $52.2 million compared to a net loss of $219 million in the fourth quarter of FY15. The increase in earnings was primarily related to the intangibles impairment charge and higher costs related to the spinoff in the prior-year quarter and a higher segment profit and operating margin expansion this quarter.

Fourth-quarter adjusted EBITDA was $119.4 million, an increase of $36.4 million versus fourth quarter of 2015. GAAP diluted EPS was $0.88 in the quarter as compared to a loss of $3.57 in the prior year. Adjusted EPS for the quarter was $1.06 compared to $0.64 in the prior year.

Now to move on to fourth-quarter segment results, Wet Shave organic net sales increased 7.4%, with growth across Systems and Shave Preps. Planned lower promotional spend in North America from lower coupons and trade spend was the largest driver of the sales increase, followed by Hydro sales growth in Asia, Women's Systems globally and Hydro Silk in international.

A quick comment on the level of coupons and trade spend in the current quarter, we knew coming into the year that this would be a driver in the quarter given the high level of spending a year ago. The level of promotional spend this quarter was actually slightly higher than our historical trends, but significantly lower than last year.

Organic Wet Shave segment profit improved by $31 million, due to lower promotional levels, as well as lower product costs and modestly lower A&P spend. As measured by Nielsen, the US manual shave category was down over 5% in the latest 12-week data, with declines in men's systems and disposables. Men's manual shave was down 6%. However, when factoring in non-measured channels, we believe the US men's category was up 2% and the overall category was down about 2%, due to men's and disposable softness ex AOC.

From a share perspective globally, we are competing well, gaining share and several non-US markets, as well as gaining share in the US. Versus a year ago, our US share was up 50 basis points in manual shave, driven by market share gains in men's. Note that our US corporate branded share results continue to be impacted by a transition of our opening price point value branded product offering in a major retailer to a private label product line.

Sun and Skin Care organic net sales increased 18% in the quarter, with growth in both Banana Boat and Hawaiian Tropic and across North America and international. The sales growth was largely volume-based and in line with the US category growth, which was stronger than anticipated due to favorable weather trends, as well as category share and distribution gains across international. Organic segment profit improved approximately $10 million in the quarter, driven by higher sales volumes, lower product costs and lower A&P spend.

Within the US category, consumption was up about 9% in the quarter and up 4% in the latest 52-week data, due to favorable weather over the peak summer season. Market shares across both brands were both -- were down slightly for the 12-week period, though both held share for the 52-week period.

Feminine Care organic net sales increased $11 million, or 11.4%, with lower promotional spending compared to very high spend levels last Q4, partially offset by lower volumes. Segment profit declined approximately $1 million despite the increase in net sales, due primarily to higher production costs and start-up costs associated with the consolidation of manufacturing into our US plant.

Now a few highlights on the full-year results, net sales decreased 2.4%, but increased 1.4% on an organic basis, which included 140 basis point impact from international go-to-market changes that were completed in the third quarter. North America net sales increased 1.7% for the full year and international organic net sales increased 1.1%, or 5% underlying basis. Gross margin was 49.1% of net sales, roughly in line with the prior year. Full-year A&P expense was 14.3% of net sales, down versus the prior-year spending at 15.2%, but in line with the Company's target range.

SG&A expense, $413 million, including $14.4 million of intangible amortization. Excluding the impact of $12 million in spin-related costs, SG&A was $401 million, or 17% of net sales. Other expense net was an expense of $3 million compared to income of $12 million in the prior year, largely reflecting the same drivers as in the quarter.

On a segment level, Wet Shave organic net sales was up nearly two points for the year, driven by lower promotional spending, strong global Hydro sales and strong private label sales in North America. This growth included an estimated $29 million of go-to-market impacts for the year.

Sun and Skin Care organic net sales were up 5%, mirroring the quarter, with growth in both product lines and across all regions. Finally, organic net sales in Feminine Care were down 1.8%, largely driven by declines in pads, partially offset by increased sales in tampons and liners.

For the full year, organic segment profit was up $12.3 million, driven by strong profit performance in Sun and Skin Care and Infant, both due to improved product costs, lower A&P and improved volumes in Sun and Skin. These gains were partially offset by Wet Shave organic segment profit, which declined 2.6% due to higher overhead costs and product costs, partially offset by lower A&P and promotional activity. Feminine Care organic segment profit declined approximately 16% due to unfavorable product costs related to start-up expenses and unfavorable transactional FX, partially offset by lower A&P.

Overall, at the total Company level for 2016, adjusted EBITDA was $440 million versus FY15 normalized adjusted EBITDA of $462 million. Although segment profit was up year over year, this growth was offset by $7 million of unfavorable foreign currency movements, $11.6 million from the impact of Venezuela and industrial, and another $15 million in other expense net described previously.

GAAP diluted EPS was $2.99 as compared to a loss of $4.40 in FY15 and adjusted EPS for the year was $3.57 compared to $2.80 in the prior year. Net cash from operating activities was $176 million and free cash flow was $107 million for the full year. This includes a discretionary contribution of $100 million we made one of our international pension plans, which negatively impacted cash flow for the year.

Adjusted working capital as a percent of net sales improved to 6.1% at the end of the fourth quarter versus 17.5% at September 30, 2015. The 140 basis point improvement was driven by lower days payable outstanding and improved days in inventory. Adjusted working capital of continues reflect a higher level of inventory in Feminine Care, which is expected to return to normal levels as we complete the consolidation of manufacturing during FY17.

In terms of capital allocation, we repurchase 2.5 million shares for approximately $197 million. Subsequent to year end, we paid down international debt by $277 million and acquired Bulldog Skin Care. Both of these transactions were completed with international cash.

In summary, we ended the year with solid fourth-quarter results on both top and bottom line. We returned significant capital shareholders and managed through complex transition issues, in line with the goals we set for the year.

Now I'd like to turn to our outlook for FY17. For FY17 we are aligning a full-year outlook metrics with the Company's long-term financial algorithm metrics, which are net sales growth, operating margin expansion and earnings-per-share growth. We estimate that net sales will increase by low-single digits, with no expected impact from currency based on recent exchange rates, although as everyone knows currency rates remained very volatile. The top-line outlook includes an estimated 40 basis point benefit from the Bulldog acquisition, which represents 11 months of activity.

The GAAP EPS outlook is $3.60 to $3.80, and adjusted EPS is estimated to be in the range of $3.80 to $4. The impact from the acquisition of Bulldog is expected to be neutral to EPS in 2017. The effective tax rate for the fiscal year is estimated to be in the range of 27% to 28%. Adjusted operating income margin is anticipated to expand by at least 50 basis points. Based on our current view, we anticipate this margin expansion will be driven by gross margin improvement and lower SG&A as a percent of net sales, slightly offset by higher A&P spend as a percent of net sales.

The full-year estimate for restructuring-related costs is $15 million to $20 million for FY17. Incremental restructuring savings are expected to be approximately $20 million to $25 million in 2017 back, with an additional $25 million in FY18.

In terms of overall quarterly phasing for FY17, we anticipate that sales and earnings growth will not be uniform by quarter, largely driven by timing of product launches and A&P spend. In particular, in the first quarter net sales are expected to be relatively flat and segment profit is anticipated to be moderately lower than in the prior-year quarter.

Let me wrap up by addressing Zero-Based Spend initiative announced last quarter. The project is progressing well and on a very preliminary review, we have estimated we can deliver $35 million to $45 million in net savings over the next two years. Savings will begin in the back half of FY17 and our current outlook incorporates preliminary net savings estimate for $10 million to $15 million in FY17.

As David mentioned in his upfront comments, SG&A as a percent of net sales will remain high-focus item for the Company. We are committed to lowering SG&A as a percent of sales, but are also investing in strategic areas to generate and accelerate top-line growth. The ZBS initiative, along with our other productivity initiatives, is designed to give us the flexibility to achieve both of those goals, providing ongoing financial and operational flexibility for reinvestment and reinforcing growth in our financial algorithm.

Thank you and with that, we will open it up for questions.

(Operator Instructions)

The first question comes from Wendy Nicholson of Citi Research.

Hi, good morning. Two questions, if I can.

First, as you look towards next year and your top-line forecast, I know you don't get specific items by segment would you still expect Skin Care to be the fastest growth segment among the three? Secondarily, can you just run through exactly what is driving the target for gross margin expansion? Is that a continuation of some favorable commodities? Is it more favorable product or mix shift? What is driving that? Thanks.

Okay, great. Thanks, Wendy.

First, the first question for top-line next year, we see Wet Shave continuing to grow kind of in the line with market, say 2% to 3% and we see Sun and Skin also growing 3% to 4%, let's say. Maybe if I can hand it over to Sandy.

On the gross margin question, Wendy, yes, you are right, we are continuing to see favorable commodity prices. Obviously, we have restructuring savings that role through our gross margin and will also benefit from some improved price mix in the year.

Got it. That is on that segment gross. On Wet Shave in particular, are you expecting a continuation of your market share gains? It sounds like your shift on the opening price point product has been really successful. Are you expecting any other changes strategically with any major customers or anything like that?

It's really based on our continued focus on building baseline share through sales, baseline sales through innovation behind -- driving innovation, focusing on building equity, leveraging the full portfolio all the way from Hydro down through private label and then continued international growth. Given the promotional headwinds, I think we are looking at more growing within the line to market growth. Thank you, Wendy.

Operator, next question, please.

The next question is from Nik Modi of RBC Capital Markets.

Yes, thanks. Good morning, everyone. Just a quick clarification. The Zero-Based budgeting savings and restructuring savings are separate, right, so you basically add them two together? I was just unclear on the wording in the press release on if those are two separate items or if you are just including all the savings together for that? That was the first clarification.

Talking about zero-based budget in general, David do you feel like the organization is ready culturally for something like this, because that obviously is the key on really having a successful program as we've seen from the other companies that have tried to do this.

Then second question is on M&A. You've obviously have done bolt-on. Just curious what you think of the environment generally for other potential bolt-ons. Thanks.

Maybe the first question, Sandy, if you could handle and I'll --

Nick, those are two separate sets of savings. They're not -- yes. They're two separate sets.

Great.

Then it's a good question about ZBS and the culture. As you think that we are, I think part of the timing and the reason that it's taking some time to get it finalized and all is we've taken a lot of time to set up the category owners set up so that we can replicate it that it's going to be part of our processes and our DNA. If you go back in time over the last three or four years, we've actually focused a lot on cost and on productivity, so it's not a new theme and I think that the organization understands.

I think ZBS is bringing tools and a process to make it a living process. I think the key is, as we communicated to the organization, is partly to emphasize that we are doing this to generate flexibility, to put money back into the business, whether it is demand creation, whether it's better organizational capabilities, or it's generating profit to return to shareholders. I think that the balanced goal there, I think will help make it a -- even more of a key lynch pin in our culture.

Moving to your final question, we're actually pleased with our little bolt on. I think it makes a lot of sense. The market out there is kind of tight. There's not a lot of candidates. We are looking hard. There is a lot of -- I think price tends to be pretty high yet still, but we're actively looking and we're actively looking at similar kinds of bolt-ons.

Thank you, Nik. Operator, next question, please.

Jason English, Goldman Sachs.

Hey, good morning, guys. Thank you for the question and congratulations on a strong finish to the year.

Thank you, Jason.

It appears that, I mean, per your rhetoric, Wet Shave, your private label showed had some great momentum. Question for clarification, are you the only ones with the capability to do a Mach3 compatible blade out there right now?

Probably not, but I think we are unique in making a fits-Mach3 that actually shaves at a performance level that really makes it a viable value versus Mach3.

In terms of distribution or penetration of the counts where you think this product could be sold, where do you stand right now?

Within the US, it's been accepted everywhere that I know of. I think if you look just at Nielsen ACV, we are still only 50% to 60% the last time that I looked. There is more room to get facings and that will be more of a process as we pass other reset times for customers, but we have broad-based acceptance.

Last question and I'll pass it on. In terms of the cadence of how that built through the year, is that distribution still going to be largely incremental as you come into the year and kind of when you start to cycle it? Thank you for your time.

Good question. I think it's sort of gradual. We'll anniversary it by April, March/April, I think.

I think it's closer to June.

Okay, yes, you are right. We didn't really begin -- so June. As I mentioned I think that it's building now.

It will be incremental in the first half.

Figure that we will really anniversary it at middle to end of next year, I guess. (Multiple speakers)

Thanks, guys.

Thanks, Jason.

Bill Chappell, SunTrust.

Hi, this is actually Stephanie on for Bill. I was -- and maybe this goes off a little bit of Jason's question. Could you give the drivers of the flat one quarter -- first-quarter growth outlook? What should we be looking for from a year-over-year standpoint? Thanks.

The question -- okay. From Q1, I think there's a couple of things maybe. We're actually comping a fairly solid year before. We're entering it with a little less promotional weight than we were last year and I can see a little bit of softness maybe on the disposable front.

Thank you, Stephanie.

Ali Dibadj of Bernstein.

I have a couple things to (inaudible). One is on the Mach3 look-alike. How do we think about the risk of patent infringements coming out for you guys from a lawsuit perspective on Gillette? That's one.

Two is on top line, even in the Nielsen numbers, if we give you everything we can from private label, so assuming your everything on private label on all the growth, it's still way far away from 9%. How do we think about if any inventory loading that happened or is that -- is it really just coming from the untracked channels? Can you please help us understand what you mean by strategic initiatives?

Okay, fair enough. On the Mach3 front, you might have seen the suit, but we are not worried about it. The Mach3 patents have expired, so we are confident we have the freedom to operate.

On the bridge for the quarter, Wet Shave was up 7%. International -- and was up $26 million. International was up $16 million, almost 9%. It was up across all the areas in its segments. You move to US, which was up 7.8% and you are right, when you take Nielsen, I will fill you in that when you add private label, total EPC Nielsen consumption was down maybe 3% to 4%.

Bridging that gap, that was all -- the major, major difference was actually price mix, where the comp versus previous year versus coupons plus some trade promotion spending, that was the big difference. From a channel point of view, measured and unmeasured, we are generally in line and I don't think -- the underlying shipments track pretty much the EPC consumption of down 3% to 4%. I don't see much difference from a ship consumption point of view.

What we were talking about with the initiatives, through -- the world is changing and through the year we've been agile and enough to move some money to try to build and accelerate capabilities in digital and in e-commerce, both in the US but also China. Then some IT support and projects that also support working capital initiatives. Then ZBS also I would tuck into there.

Thank you, Ali.

Olivia Tong, Bank of America Merrill Lynch.

Thank you. Wanted to talk about the sustainability of growth. I know there's an easy comp in Q4, but your two-year stack saw pretty big acceleration. So why doesn't more of the benefit of the growth that you show in Q4 flow through to next year, because it doesn't look like you are really expecting much for FY17?

In terms of the pull back relative on a year-over-year basis in promo and couponing, what does this say about the necessary levels of promotion and couponing to spark activity in your categories? Thanks.

Yes, okay. The first part of that, last year's quarter was an anomaly. When you look at it -- let's see. International grew -- the easiest way to say this is half or little more than half of the sales growth versus year ago was driven by lower couponing and promotion. That gets us to 3% to 4% kind of normalized growth.

That was driven by some underlying growth in the US, but a lot of growth internationally where we were up in all geographies and all segments. It was a strong quarter gain share in the US and in most major markets, but I wouldn't draw just a straight line from it there on. It was a very good quarter and with competitive pressures and all, I wouldn't say that we could do that every quarter.

Your second question, I would just say that from a, do we have the right level going into next year. The quarter this quarter was a pretty normal quarter when you compare trade spend to the year average. It was comparable. It was higher than that of two and three years ago, so it was a pretty sizable level and we are confident that it kicks us off in a good place.

Thank you, Olivia.

Kevin Grundy of Jefferies.

Thanks, good morning. First question, Sandy on going back to the ZBS and the restructuring, can you help us better understand the split of those savings from COGS and SG&A, where some of these savings are going.

It seems like some two-thirds is going to be reinvested. How much of that goes to advertising and marketing? How much of that goes to other areas? Where can SG&A go over time, just beyond what you've currently outlined? How should we be thinking about where core SG&A can go? Then I have a follow-up. Thanks.

Okay. On the restructuring savings, really all of that goes into our gross margin and cost of goods sold line. From ZBS, I would say that project is looking at every line item and every cost bucket. And so, while I can't give you specifics on line item at this point, because we are still only halfway through the project I will say it is likely we will see savings across every line item. Probably not as much in cost of goods, sold but we'll see it in certainly in SG&A, we'll see it in R&D, we'll see some in our gross to net sales line items. We are really looking at every cost bucket we have.

In terms of where it's going, I think David expressed it well at the beginning, which is we're really -- this is a balanced plan and a balanced view of how we'll reinvest and look at the savings from ZBS. Some of them will be going up and reinvested back into gross to net, some of them will be reinvested back to A&P and some of them will be reinvested back to SG&A to build capabilities. Overall, we continue to focus on our financial algorithm of 50 basis points improvement, so some of them will go to shore that up as well.

Okay, that's helpful. The follow-up for David, can you touch on Shave Club, both the risks and opportunities there? Now we've seen Harry's move into Target and they've had some success there. I think surprisingly so, probably to both for them and the industry, I suspect. Clearly Unilever has placed a decent size bet on Dollar Shave and I think collectively there would probably be a lack of surprised if we saw them move into retail at some point, as well.

Seemingly, I understood you guys are participating, but I think there still sort of questions from your side in terms of the economic viability of the model, despite the fact that it seems like enrollment continues to move up there and consumers are willing to pay for the convenience despite the fact the efficacy is a bit lower and frankly they're even spending more annually on the blades. Your updated thoughts there would be appreciated, given the growth that we are seeing there with enrollment. Thank you.

Well, it is certainly a challenging area and a place where the world is changing. Certainly e-commerce, broadly speaking, around the world is a major issue, not only for us but for every CPG company. We're working hard to really ramp up digital capabilities in the broad sense and beyond just US, frankly.

Within the US when you look at e-commerce, when you look at the omni-channel and the pure play channels, we've been powering up capabilities, putting a lot more resources against that. We've gain share within those segments for each of the last three years.

Now, when you talk about the shave clubs you know the jury is out and we can speculate where they will morph over the last -- sequentially over the last two to three quarters, they've been pretty flat. Not versus a year ago, but quarter to quarter to quarter. With the challenge about profitability, I think you see them thinking about how to get their basket size up, become more than a shave club to really survive. I think there's a question about how much aggregation needs to happen. It's a question and I'm not going to speculate how much Unilever uses TSC as a shave club or an entry way to men's grooming or a personal care. That's, I think, the big question mark.

In terms of Harry's coming into Target, they've got good execution with an end cap and so not surprisingly generated pretty good early trial. They got a sizable part of share in Target and they got about a two to three share of systems nationally. I think we got hit with fair share, maybe a little less than fair share, so it's not a huge impact yet.

We will see how their trial converts to refills and we will see how their share moves once they go back to a more normal in-line set and we will see just how category profitability in that customer moves. As far as our plans there, they operate in a level where we have several options within our product mix and we will monitor them.

Thank you, Kevin.

Bill Schmitz, Deutsche Bank.

I have two questions.

The first is on the gross to net sales number. Can you tell us what the gross to net was last year and what was this year and then bridge us to the gross margin year-over-year change? Because it seems like a decent chunk of that gross margin expansion -- and I get that it was just very elevated gross spending a year ago, but it seems like a lot of that gross margin expansion was driven by that. Operationally, I think it would be really helpful for you guys to give us a split between volume and price mix. Would be okay for you guys to give us that number this quarter, what volume growth was versus price mix? Then I have a follow-up, please.

I will jump on a couple of the questions. Yes, Bill, you are right. The gross margin expansion for the quarter was largely driven by the lower promotional spend in the gross to net change.

Most of our sales increase this year, or this quarter was the price mix. We did have some volume growth and Sun and Skin and I think -- but I think that's really predominantly how I would talk about it. The majority of it is price mix.

Okay. That's helpful.

Just looking at the price per blade, do you think that the industry is at peak price per blade pricing? It seems like it's gone very far. Every year it was profit per user, per year and it seems like you're getting some pricing friction. Do you think the category went far? Not that it's a bad thing, but do you think we are probably peaking in terms of price per refill blade?

Along those same lines, why aren't you more aggressive and some of those direct-to-consumer channels? Why isn't Amazon selling private label blades yet? It seems like a logical customer. Why haven't you maybe embraced Dollar Shave Club in terms of supplying them, because obviously the product quality from the blades they're using is dubious at best and it seems like if you are already selling quite a bit of private label, it doesn't seem like there would be a lot of channel conflict in supplying them.

Okay, thanks. On the first question, I think at the high end it's going to be hard to move price per blade a whole lot further over the short to medium term. That doesn't mean the average price per blade overall needs to be capped, because I think there is different segments of consumers all the way through the market and I think through innovation and all those tiers we can get better product, better value, higher price. I think the trade up remains a possibility and an opportunity for us and our customers. I think it's just not the same escalator of men's systems that it was. I think there's innovation at the top end, but that won't be, I think, the main driver.

In terms of your other questions, I think they are a little more customer driven than I'd like to comment on for competitive reasons and for customer reasons. Thank you.

Can I just ask you why like why Amazon isn't doing private label yet, though? Is there reason for it? Because they've added a lot of other categories. It'd seem like it would be a logical one.

I would rather not walk in their shoes. I'd rather not comment on that.

That's fair. Thank you.

Thanks Bill.

Jonathan Feeney, Consumer Edge Research.

Good morning. Thanks very much.

You answered all these questions by saying EPC overall Wet Shave takeaway, including private label, was down 4% and if I wasn't sure if that was a global or North America number. I'm trying to get to the bridge between that and the 7.4% organic rev growth you showed in Wet Shave. Is that all price mix on the lower trade spend or -- and if private label is growing faster within that, even if these Mach3 emulations, doesn't that give you somewhat of a negative mix?

I'm trying to understand the pricing that's overcoming that or is it international or something I'm not picking up? I know Sandy gave us four factors. Just a bridge between those and what is going on? I would appreciate it.

What I was saying, the total EPC consumption down 3% to 4%, that was a US Nielsen.

And that's a dollar number, not a volume number.

Correct. What I'm saying is that if you look at our shipments to consumption, they were generally trending with that, except for the -- so the volume impact. What I'm saying is, the entire bridge from down 3% to 4% on volume to our shipments up 7.8%, that is all price mix. Generally coupons, but also trade spend. That's what I'm saying. I didn't quite follow your private label point, so if you could walk through that again?

Yes, sure. I gather, particularly with the Wilkinson Sword substitution, but overall, private label has been growing faster. I would think that, that creates -- and correct me if I'm wrong, but that would create a negative price mix factor in general.

It's lower dollar per unit than average for your portfolio. Is that a correct assumption as private label grows faster, both in the quarter and the year, that pricing more than offsets that, I guess is my -- is that right?

That's a different question than trying to bridge to consumption, right?

But it would be part of that. It would be partially offsetting and make the price that was needed even more. That's all I meant.

I don't think that's a major part of the bridge, other than the customer takes a different margin, on percentage margin, on private label versus branded and that diverges Nielsen versus ours some, but is not the main driver in the quarter. I go back to, the major story was lower couponing and trade spend this quarter versus previous year.

Thank you very much.

Ian Simpson, Societe Generale.

Hi, there. Couple of questions, if I may. Firstly, it seems that in general promotional intensity was down across the board quite meaningfully for you. This is kind of a market-wide trend or is it more just that you were lapping an exceptional promotional heavy quarter?

Secondly, can we dig into the weeds on your expectations for Wet Shave a bit? You're talking about 2% to 3% growth, in line with the market. Within that, are you thinking your price-mix balance is likely to be pretty much in line with the market? If so, how should we think about that weighting between price mix and volume.

Secondly, when we think of the parts your Wet Shave business, the branded, the private label and the online, any areas within that where you hope to be outperforming the market? Thank you.

Great question.

In terms of promotion for the quarter, I have to say within the shaving business in the US, promotional intensity has never really been higher. Our major competitor, the percentage of volume done on promotion both for men's systems and also disposables, was higher than we've seen, so it was pretty heavy.

We were down, but I think that was down versus, as you mentioned, a pretty high year ago and I think we were at levels that we were pretty comfortable with. We are trying to keep our focus at building baseline volume, baseline share through equity and innovation. Expectations about price volume mix for next year, I would say that it is a balance. It would be relatively in line with the category.

One thing to think about on the Wet Shave is we will have some new products. We'll have what we talked about earlier, the anniversarying through the first couple of quarters with the fits-Mach3 product. We've got, obviously, international growth continuing. We do have some relatively good volume growth in 2017 based on our current outlook. We also have some improvements in price mix as well.

It's balanced.

Thanks, Ian.

Andre Shepley, UBS.

Thanks. Hi, everyone. I just have a quick housekeeping question. Your 100% plus free cash flow productivity guidance for 2017, is that based on GAAP or non-GAAP earnings? Thank you.

GAAP earnings. GAAP net earnings.

Okay.

Thank you.

There no additional questions at this time. This concludes our question-and-answer session. I'd like to turn the conference back over to David Hatfield for closing remarks.

Thank you all for your time and your interest and have a great day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.